The financing of crowds through online platforms, known as crowdfunding, is becoming more familiar to entrepreneurs and venture investors. The crowdfunding market is getting more sophisticated day by day and the number of alternative financing platforms is growing along with the internet.
A social capital score is one of the novelties that are going to be brought into the market by Bank to the Future, a platform that is to launch within a few weeks in the UK. Instead of choosing between reward- or equity-based crowdfunding, the platform will provide both options, plus crowd-lending. Bank to the Future chief executive and banking reformer Simon Dixon forecasts that eventually banks will stop investing in start-ups and SMEs For that reason, Bank to the Future aims to become a new kind of “entrepreneurs’ bank”.
Social capital score
Alternative financing is set to leverage our social capital. Bank to the Future is going to calculate your social capital score based on four main data points, explains Simon Dixon: “Firstly, everyone will have an influence score, and that influence is online only. We integrate other platforms; these are connected to the service called Cloud. Cloud measures your performance and gives you a score, up to 100, based on how engaged you are online. If you’ve got lots of followers and you just spam people that doesn’t really help your score. If you have lots of followers and people interact with you, comment and like what you’re doing, then you get a higher score.”
“The second data point is a social score based on your online visibility: how present you are on the main networks such as LinkedIn, Twitter, Facebook and Google+. If you’re registered with a real photo and under your real name on other social networks that helps to verify that you are who you say you are. It also includes ratings based on your behavior on the platform: whether you deliver what you have promised, whether you repaid your loans, how you treated your investors in terms of reporting.”
The third and fourth data points are traditional credit and identity scores, which are the same processes the banks would use to assess credit score and verify people’s identities: “Put these four scores together, and you’ve got the social capital score, which people can use as a measure to figure out how trustworthy a person is,” concludes Simon Dixon.
Rebels against any scoring system could get away without filling in their social details and have a score of zero, but there is no place for anonymity on the Bank to the Future, says Dixon: “A lot of our competitors allow people to invest under a user name, an anonymous identity. We hold the belief that no one should want anyone to invest into a business without knowing who the people are. They could be competitors, they could be anyone. So we’re going the extra mile to make sure that everyone who is investing, and launching pitches, and coming into a legal relationship, is who they say they are.”
There’s no one right way of doing crowdfunding; emerging platforms simply add new opportunities to the market. For the first time, three financing models – crowdfunding, crowd-investing and crowd-lending – are going to be merged together by Bank to the Future. “Anyone that follows crowdfunding would see that these are three different models. Anyone not familiar with crowdfunding see it as one product, and it’s called raising finance,” says Dixon.
For example, crowdfunding, according to Dixon, is the best for testing business ideas: “If you’re very early stage – you’re creating an app, a movie, or a website – the best way to do this is crowdfunding, where you offer rewards. Crowdinvesting allows you to scale your ideas. If you have a good management team, a good business case and a good financial model, then you may be able to raise more by offering equity to investors.
“Finally, if you have a good credit rating and cash flow, have some trading history and have been around for a couple years, then it might be appropriate to borrow from the crowd, so we call it a crowd-loan. Crowd-lending allows you to get some more working capital to be able to expand and grow. And by the time you’ve done that, you’re ready for venture capital.
“In the UK market, we don’t really have a venture capital market that wants to invest in risk. VCs typically invest in growing companies that tick all the boxes: the perfect management team, the perfect experience and a turnover forecast from £100 million to £500 million in 3 to 5 years. But hardly any businesses tick those boxes. We think this gives you an opportunity to actually become a VC in a way.”
Supply and demand might not quite match Dixon’s aspirations yet, but he sees a great need for businesses to raise equity finance at the moment: “This model seems to be the most popular.” Then again: “If you’re looking at the bank lending market, it’s worth £44 billion to the small and medium size enterprises right now, which is larger than equity finance. The reason is that everybody understands debt. The lending market is larger at the moment, but maybe with more education equity could be as big.”
When it comes to education, Bank to the Future will try to introduce crowd investors to the rules of what venture capital and angel investing is. “Maybe people aren’t aware that the best way of investing in start-ups is by taking a diversified approach, so rather than putting all your money into one, you invest in ten and one of them might work,” says Dixon.
Therefore the platform seems to be designed for the long haul: from launching your idea to borrowing from the crowd to expand the business with a help of an established social capital score; from educating investors to providing more tools to manage portfolios.
An entrepreneurs’ bank
“Our big game, our business plan, is to become an entrepreneurs’ bank”, says Dixon. “We looked at all the banks in the UK, and about 92 per cent of all money that they lend either goes to property investing, speculation and casino banking, or personal loans. Because of the regulations, only 8 per cent of the money goes to small and medium size enterprise. And at the moment banks are decreasing their lending to SMEs. On the flip side, crowdfunding is growing about 361 per cent a year.”
“I think banks are going to exit the SME market. We don’t need to pretend: banks clearly don’t want limited liability when they can make loans on property and things with security. We would like to serve a productive economy, people creating things and leave the banks to do all the speculative stuff.”
Dixon believes that the banking flaws can be only fixed by the Government, but such alternative financing platforms can be a painkiller by taking as much money into productive use, such as creating businesses and jobs, and leaving less for banks’ speculative activities.
It is expected that in 2012 crowdfunding will raise about £1.8 billion globally, almost twice as much as last year, according to Massolution, a research firm. While in the US equity based crowdfunding is still waiting for its turn – the Securities and Exchange commission are yet to define the rules to implement the JOBS Act – the UK is pioneering equity-based crowdfunding.
Bank to the Future is launching without Financial Services Authority approval, but Dixon is aware that it’s one of the platform’s responsibilities to protect the image of non-regulatory crowdfunding market. “This non-banking market is growing fast and is being promoted by the Government. But we’re a new market, so we are going to have lots of challenges in growing and making this compliant and responsible; and that’s a collective challenge between all of us operating in this market to work together to achieve it.”